ILS funds return 0.42% for October 2016 on hurricane Matthew losses

Insurance-linked securities (ILS), pure catastrophe bond and reinsurance linked investment funds saw a below average return of 0.42% in October 2016, as the majority of hurricane Matthew losses were factored into monthly NAV’s.

Two ILS funds investing in private ILS and collateralised reinsurance transactions reported a negative return in October due to losses from hurricane Matthew, but for the majority the impact from the storm has been minor and the 0.42% average ILS fund return has helped performance for the first ten months of 2016 outstrip the full-year 2015 return already.

The Eurekahedge ILS Advisers Index recorded 0.42% growth in October, which is slightly below the long-term average of 0.54% but still not a good monthly result given the most significant hurricane landfall of the last ten years striking the U.S. in the form of hurricane Matthew.

The fact that the Index has remained so positive even after a major hurricane event is testament to the growing diversification and reach of the ILS fund market, suggesting that ILS funds exposure in U.S. hurricane exposed states such as Florida is not as concentrated as it once was.

Stefan Kräuchi, founder of ILS Advisers, explained to Artemis; “On the whole the impact to cat bonds and private ILS was limited and most ILS funds were not impacted by the event. This again shows the diversity of underwriting strategies and risk layer selections among ILS funds, which lead to different return patterns in case of major events.”

In fact the ILS funds only investing in catastrophe bonds had a good month, despite some mark-to-market impact to prices as hurricane Matthew approached. This was largely recovered and pure cat bond funds reported an average return of 0.31% for the month of October.

Meanwhile the funds investing in private ILS and collateralised reinsurance continued to benefit from premium allocation and the minor impact of hurricane Matthew was not enough to hurt the average fund return significantly. Private ILS funds as a group reported an average return of 0.50% in October.

Kräuchi explained the month’s performance in more detail; “Two funds were negative in October. Both are private ILS funds that were impacted by Hurricane Matthew.”

But with the loss development continuing there is the chance that some contracts could see losses in future months, as calculation of claims continues.

“Most of the impact from the event had been reflected on the October NAV of ILS funds. However, there is still possibility that the loss will change when the claim collection process goes on, so could the impact to private contracts,” Kräuchi continued.

The fact that ILS fund returns in 2016 have already outstripped 2015 is “a further signal for return stabilization” according to Kräuchi.

Year-to-date the ILS Advisers Index has yielded 4.68%, which is ranked right at the middle of the eleven years since 2006 when the history of the Index began.

During October, thanks to the impact of hurricane Matthew being uneven across ILS funds due to their differing strategies, the difference between best and worst performing fund was stark at 1.81%.

However, 32 of the 34 funds represented in the Index reported positive returns, but private ILS funds outperformed pure cat bond funds by 1.11% on annualised basis.

So hurricane Matthew’s impacts have clearly been detrimental to some ILS funds, which had a greater exposure to U.S. hurricanes striking Florida and the south-eastern seaboard of the U.S. But for the majority it appears to have been merely attritional.

October’s performance does continue to trend of attrition in 2016 though, with ILS funds paying a number of small losses this year, reflective of the continued expansion into collateralised reinsurance.

Despite a number events that have impacted ILS funds this year the fact that returns are up on 2015 already is testament to the expansion of the market and ILS fund managers ability to access attractive reinsurance business.

Eurekahedge ILS Advisers Index, showing average return of ILS and cat bond fund market - Click the image for more data on ILS fund performance

You can track the Eurekahedge ILS Advisers Index here on Artemis, including the new USD hedged version of the index. It comprises an equally weighted index of 34 constituent ILS funds which tracks their performance and is the first benchmark that allows a comparison between different insurance-linked securities fund managers in the ILS, reinsurance-linked and catastrophe bond fund investment space.